Winners & Losers in a Digital Age

Conferences are an excellent way to consume information about the online world and I recently looked at the best ones to attend in New Zealand & Australia this year. Its great to attend a conference but with so many going on around the world impractical to attend them all – luckily almost all talks at these conferences are recorded and freely available on video sites to watch. In 2014, a talk by Scott Galloway at Digital-Life-Design conference in New York stood out for me where he details who he thinks will be the big winners and losers in the Digital Age which we are currently in. Find out why he thinks Instagram is on a path for social media success and what the future of eCommerce may hold below.

Scott Galloway: Winners & Losers in a Digital Age

Good afternoon. It’s strange to live in New York and go to a conference hosted by a German media company. I feel like you’re coming home. I’m just such a huge fan of Steffi and Dr. Kallen and the team. So, thanks again for hosting me.

So, the title of my talk, the last question that Henry had was who’s going to win. I think it’s often interesting because in these conferences, we spend a lot of time talking about the winners but I think it’s often more interesting to talk about the losers.

In our low growth economy, we only have 2% GDP growth. Any company that’s growing faster than 2%, there’s someone on the losing end of that. In NYU in 2009, we developed an algorithm to look at 850 data points across the hundred biggest brands in the world. Because of Moore’s Law, scraping technology, we are now tracking 5,000 brands across the 11 biggest markets in the world. We then sit down with the brands and tell them where they’re strong and weak relative to their competitive set. And the effect is we become modern day train spotters or bird watchers in that we see patterns, we see where the biggest brands and retailers are investing; what technologies, what platforms, and what they’re not investing in. We have a sense for who we think is winning or losing in the ecosystem. And every year, we sit down with our brands, we ask them to pick a market, a geography, a business sector, a group of stocks and we give them opinion on who is accreting value and who is losing value. We affectionately call it zero or one, winners and losers in the digital age.

Some fine print, when we say winners, we don’t mean the game is over, we mean that we think that the value of that organisation is going to increase over the next 24 months, and losers just mean that we think from this moment in time, your value is going to decrease. So with the fine print, we’re looking at three sectors today: social media winners and losers, winners and losers in retail, and winners and losers in broader society in general because of some digital innovation that’s taking place and reshaping the world.

We think the webs seminal driving force right now around social media is the transition from text to visual-base mediums. We’ve been listening to words for thousands of years, reading words for hundreds of years, but we’ve been absorbing imagery as a communication vehicle for millions of years. As a species, we are very good at interpreting information through images, we absorb images 50 times faster, brands and organisations are starting to figure this out, and they’re making their websites less text-based and more image-based because they speak to your heart and they inspire action in a more fluid way than text.

We’re seeing this in Google and Twitter trying to become more image-based, we’re seeing this is why print is still a fantastic business because it speaks to our heart with very strong imagery and we’re starting to see it in store. We’re starting to see it online specifically with great platforms including Instagram, our first winner. We believe Instagram within 24 months will be the most powerful social media platform in the world. This is the Instagram page of a great little brand called Benefit. Immediately you’ll understand the product it’s eyelash, mascara, it gives you a sense of the appeal of the product and the emotional connection to the product.

If you look at an axiom around what we believe is going to be the most powerful platforms in the world, it’s two primary drivers. It’s an access of who’s born on a mobile device and understands how to deliver content to you on a small screen and also who’s the most visual. We think the combination of those two, the winners go to Instagram, Pinterest, excuse me, Instagram, WeChat, Kakao Talk and Line.

We believe Instagram may already be the most powerful platform in the world. It’s now grown to 200 million users. But if you look at its growth, it’s growing faster than any other social media platform in the world right now. When you look at the social in social media, you have to measure engagement rate as registered by this percentage of the community, the likes, shares, or comments on a piece of content. If you look at the size of the community times the engagement rate, Instagram has 15 times the engagement rate of Facebook, 25 times the engagement rate of Twitter. If you take those two as a power index, Instagram is already the most powerful platform in the world.

We believe the other big winner is going to be WeChat. WeChat may be the first brand to come out of China that may be a global brand. It’s a top 10 download in 43 markets. Kind of strange that the second largest economy does not have a global brand yet. We believe this could be the first. We’re also seeing a loser in China, and that is the former leader Sina Weibo’s decline which is almost perfectly inversely correlated to the rise of WeChat. So there are losers when we start talking about winners.

So let’s talk about some of the losers. Again, great companies, we just feel that they’re going to be worth less than they are right now in 24 months. We think Pinterest has been blown by and practically run off the road by Instagram. Instagram now has triple the community size of Pinterest. Two-thirds of Instagram users were on the platform everyday versus less than a quarter on Pinterest. Pinterest owned the visual web, they have ceded control, they have abdicated the leadership position to Instagram.

Twitter is trying to go visual, it’s taking too long and they’re beginning to pay the price, we believe. We do an analysis for the 5,000 brands which we tracked, looked at the percentage of traffic these brands are getting from various social media platforms and break it down. The lower right hand bar is the percentage of traffic the 5,000 brands we track in these markets is getting from Twitter. As you can see, the amount of traffic that is actually going to the people who would likely be their advertisers is pretty minimal. IBM tracks a hundred e-commerce sites in Black Friday and could not discern a statistically meaningful amount of traffic that converted to actual purchase. In other words, the traffic coming out of Twitter is almost meaningless on an economic level to the biggest advertisers and retailers in the world. The number of advertisers on Twitter is actually less in the platforms of the brands we track. LinkedIn has more relationships with advertisers than Twitter at this point.

Another loser, Tumblr. We believe that Instagram is the best acquisition of the last 5 years and Tumblr is the worst. Both cost about a billion dollars, both have the same user base, Instagram will do between 250 million and 450 million revenue, this year. Tumblr was noticeably absent from Yahoo’s earnings call which means that likely revenue is somewhat negligible.

Some of the winners in retail. First off, an obvious one, Amazon. Amazon is reshaping how value is signaled in retail. Things like, operational, returns, exchanges, pick up in store. When retailers are asked what they think consumers value or what consumers want from them, they think it’s deals and promotions and merchandising-based incentives. It’s not. Consumers want same day delivery, they want the ability to pull out their smart phone and look at eye-level skewed data, they want to pull up their loyalty program in the store. Operational things that Amazon has taught them to expect, they are massively expecting. Amazon is teaching the whole world how to shop. And unfortunately, it is very expensive and it’s a great strategy for them because they have had the lowest cost of capital of any company in the world, they never got into the habit of giving their investors the crack cocaine of profit. They have been spewing them a steady dose of Methadone in the form of a big vision. No company has ever had access to this cheap a capital for this long and they are taking advantage of it, tapping into what consumers want and value in an area that is massively expensive. Or put it in another way, they are going underwater into the world of fulfillment which is very expensive, with the largest oxygen tanks, forcing every other retailer to follow them. But everyone else is following with a smaller oxygen tank and will begin drowning.

Seventy-five percent of their operating expenses is in fulfillment and technology. We never had a retailer spend half of that. They are absolutely going to where the puck is and they are convincing consumers that’s what they should differentiate their purchases on.

If you look at where Amazon used to build warehouses, they used to be in low cost areas, where they built warehouses in the last 24 months is right outside urban centers. It’s clear, they’re trying to get you 50% of everything you need to 50% of households within 4 hours. When Amazon is in your house every day or every week with Amazon Fresh their grocery application, they know what you want, and they begin sending you products before you even ask for them, they effectively become the cable pipe of stuff into your house. Instead of delivering zero and ones, they are gonna deliver atoms. Just as your cable pipe has tremendous command and power onto your household of all media, Amazon is building the same power into your household of stuff. A huge winner.

Some of the ancillary revenue streams they have developed because of their dominance. They are becoming a huge media company, they do about a billion dollar selling media this year. So they’re likely to be as big or potentially bigger than Twitter if they maintain growth of Amazon media group in the next two years. And we have never seen a retailer muscle big brands around the way that Amazon is right now.

Estee Lauder and LVMH have a zero engagement policy with Amazon meaning they will not talk to them, they will not advertise, they will not officially distribute their products. We scraped for all the product skew level data of Amazon. What do you know, LVMH and Estee Lauder have some of the broadest product selection of their skews on the platform. Amazon says to Burberry come distribute officially through us. Burberry puts up 15 skews officially on their luxury beauty store and magically, the thousands of diverted or counterfeit products disappear. L’oreal begins advertising on Amazon and all of a sudden all of the bad imagery and bad pricing around their products magically disappears. Amazon has become the Tony Soprano of e-commerce, you either pay to play or you get hurt on their platform.

Who gets hurt? People think Amazon is putting Brick and Mortar out of business. That is absolutely not true. Department stores were supposed to go out of business, they’ve ceded share 9 of the last 10 years. Don’t tell the shareholders of Macy’s or Nordstrom’s that who have recently enjoyed all-time highs in their stock. Great digital IQ stocks including Tiffany, Sonoma, and Sephora are at all-time high. Sephora is now the driving growth force in LVMH, and has replaced Vuitton as the growth vehicle.

93% of all retail is still done in stores. We tend to size our investment around digital, around the size of the e-commerce business, you’re missing the point. You should size your e-commerce or your digital investment around the size of your total business. Mobile commerce will only be 30 billion dollars in 3 years, that’s a pimple on the retail elephant, but it will influence 750 billion in sales. The return on investment in great digital is recognised in that very ugly thing called Bricks and Mortar. Stores are where we are going to recognise the return on investment in great digital.

Macy’s is responding, turning 380 of their stores into mini warehouses to compete with Amazon with same-day delivery. Sephora, probably the best multi-channel experience from a digital perspective, you can setup a reservation on your phone. It smells your IP address when you walk by and sends you a text message asking you to come in for a free makeover. When you’re in the store you can setup, you can look at your loyalty program and see how many point you have, scan a QR code and see user reviews.

Some of the losers in retail. People think that Brick and Mortar loses from Amazon, no. Who’s losing because of Amazon? Others e-commerce players. I think these are great companies, I just don’t think they have the skill online to compete with Amazon and I think slowly but surely Amazon is sucking the room, sucking the oxygen out of the room for every other e-commerce player and over time their value is going to decline if they are not bought by Amazon.

The other big losers are retailers and brands with weak digital. Hermes like a lot of family controlled companies in Europe and luxury is just sort of hoping the internet is gonna go away. Target and Toys R Us outsourced their digital, leaving the confidence to outsiders so they ended up with an un-differentiated and expensive product and its going to come back to haunt them. Prada’s website stayed perfectly static the last two weeks of August. I would speculate that that’s when Miuccia Prada is in the south of France.

Let’s talk about society, who wins in a digital age. There are some real victories here. The Abject Poor, is declining at a rate we didn’t anticipate. The World Health Organisation thought the Abject Poor was going to take 40 years to be cut in half and it only took 20. We think we’re going to cut it in half again over the next 10 years because of basic vaccination, food distribution, and GPS communications technology. This is arguably the biggest victory in our society over the last 50 years.

Other winners, the middle class in emerging markets or what we call consumers people who just have enough money to start buying things beyond basic shelter and food. This was only a third of our global population 5 years ago and it’s about to flip to two-thirds. And companies like P&G and Unilever that have exposure to the middle class, these markets are going to boom. This is a huge victory and a very exciting time to be a brand that caters to the middle class in emerging markets.

Who are the losers? Easily the middle class in developed markets. There’s this thing called the Myth of Progress that rising tide lifts all boats. What we have is a tide of very choppy waters raising that’s created a set of super mega yachts and everybody else is struggling to stay afloat. Unilever created 700 thousand dollars of market capital per employee, Intel 1.2 million, and 21 million at Facebook. This is fantastic if you work at Facebook, great if your own real estate in San Francisco and a Ferrari dealership in Palo Alto, but it’s bad for society, jobs are being destroyed at a rate we can’t replace them.

People say, well, a lot, I’d say the same thing. 4% of the population is in agriculture was at 40% at the beginning of the year and new industries pop up. The question is what’s happening?

And employment is going down but effectively you have this, in fact, what I call the iPad effect where Estee Lauder is reporting that people convert to purchase at a Macy’s at a greater rate if they begin interacting with their Clinique application on their iPad versus a sales associate. So sales associates are being fired. These people make 40 to 80 thousand dollars and that job is bifurcating to either 120 thousand dollars systems application engineer at Apple or a 19 dollar a day assembler at Guang Zhou, China. So the middle class is getting hammered. These are the jobs in the middle. In the middle, these are wages. This is where people are losing jobs, this is where people are gaining jobs. As you can see across the middle paying jobs, this is where the job growth, the job loss is taking place. There is some great job growth in high paying jobs around technology but the majority of job growth where these people are being arbed or arbitraged down to are low paying jobs in the services industry and retail industry where they have less flexible hours, less security and most likely no insurance.

People will say, well, income inequality is a part of capitalism and it’s a good thing. But once we get to the income inequality that we’re experiencing here, it is a bad thing. Once the bottom fifth comes totally out of whack with the top fifth, infant mortality goes up, age and life expectancy goes down. This is one of the pieces of data I’ve found last night as I was thinking about this, I found it really rattles you. This is the resting diastolic blood pressure of kids in middle class households versus houses in poverty while they’re sleeping. And this is the level of stress hormones in a 9 year old in houses in poverty versus middle income. So even in ages as early as 9, you see kids suffering from this type of income inequality.

I love this photo. I pulled this off of the Business Insider which is my first read every morning. It’s a kid waiting, sitting in the sun, basking in the sun while his parents were in a line in a food bank. It’s taken in Los Angeles.

Gotta do a man in the mirror test. What is causing this? Education used to be the lubricant of upward mobility. My industry has done a terrible job. We’ve become the sand in the gears for upward mobility. Cost me $4,000 in total tuition to go to UCLA as an undergrad, and then $4,000 total tuition to go to Berkley for business school. It’s now somewhere between 100 and 150 thousand for each of those institutions. In addition and largely that’s been fomented by this failed system of tenure that doesn’t punish irrelevance among my colleagues.

In addition, campuses have become so horny for revenue that they’re taking in many more foreign students who pay full-freight and weren’t eligible for financial aid. So we have fewer and fewer seats for kids domestically. The result is that kids with the same skills you had 25 years ago in the US paid 5 times as much for a degree from a much lesser institution.

The biggest victory in the history of the US was the middle class was better than everybody else. This has been the most positive force on the planet economically. But we can no longer boast that our middle class is better than yours. The average household income of the middle class in Canada just passed the US. As you can see the other developed nations are beginning to narrow the gap. We are losing what has been arguably our greatest advantage and greatest pride as a nation.

Income inequality is out of control. The top 10% now control 75% of all assets in the US. People talk about the top 1%. They’re missing the bow. The top 1%, 99 to 99.9 are actually about the same in terms of the amount of asset they’ve controlled for the last 40 or 50 years. But once you get to the 0.1%, you start to see they’ve gone from about 6% to about 12, they’ve doubled. But then we go to the 0.01%, and that’s where things get really crazy. The top 1 in 10,000 income earners or asset holders have gone from controlling about 3% of the nation’s assets to approximately 12% or their share has grown 300% in the last 40 years. It’s not rich against poor. It’s uber wealthy against everybody else at this point.

Big money and politics is fuelling this downward cycle. You can now buy a state in a primary election. South Carolina costs 5 million. It costs 10 million to go into Mitt Romney’s campaign in Florida to put him over the edge. This is an incredible value. There are only 5 business schools that have not been named. The Blue School was the last one to be named. It costs 300 million dollars. You could probably put somebody in the top 5 candidates in the White House for $250 million or put it in another way, it’s cheaper to put your name on the White House in 2016 than on Columbia’s business school.

The descendants of the Walmart family, the Walton kids now control more wealth than the bottom 40% of US households. This has created what I would refer to as an Upward Spiral Downward, between the explosions in wealth of the top 0.1%, dark pools of money being able to influence politics since the citizens united ruling. And then cronyism on steroids in the form of what we call the US tax code, where we talk about the American Dream, the largest tax deduction is the interest on your house. That’s nothing but a transfer of wealth from people who rank lower in middle class to upper middle class and higher income earners who own their houses. Capital gains the other big tax cut. The lower 50%, the lower medium of the US population only owns 8% of the stocks. So again, another wealth transfer from the middle class to the upper class.

This is a bipartisan effort. The Affordable Care Act charges young people $400 for $300 of healthcare. And old people $400 for $700 of healthcare. So again, another income transfer between young people trying to make their way versus old people who tend to have more wealth. If you work at Sotheby’s and you’re an auctioneer, you get paid on commission. If you buy a piece of art for a million, you sell it for 2 million. You get a commission on that, that commission is taxed ordinary income. Dan Logan invests $100 million in Sotheby’s if he sells his stock for 200 million, the commission on his gain is taxed in something called capital gains on carried interest, he pays a lower tax rate. We’ve changed the vocabulary, we called commissions for venture capitalists and alternative investment managers, long-term capital gains or carried interest or as we called commissions for middle class people just commissions if they have to pay ordinary income on.

This has become the upward spiral, the downward spiral has been ossified in our country through a combination of cronyism, tax policy, and technology that is creating massive wealth among the people who own the factory versus those who work in it.

Bonus round. First trillion dollar market cap firm in the next 18 months. Amazon has made good use of its cheap access to capital, trades at 56 times ebita. However, the best neighbourhood in the world is luxury. You wanna be in a business that leads with your heart not your head, results in irrational wants and needs which translate to hot, large margins. The investment community has recognised this. Estee Lauder has a larger market cap than the guy from WPP who was up here. Richemont has a larger market cap now. The guys who make Panerai, Cartier and Van Cleef & Arpels have a larger market cap than Deutsche Telecom. Michael Kors has a larger market cap. The 12 or 13 billion dollars in Tiffany and Abercrombie combined. However, Apple is the best house and the best brand in the world in a bad neighbourhood. People leave with their heads when they’re talking about tech which is a terrible business to be in because if you don’t reinvent every year, your stock gets hammered. Its a terrible real estate strategy and terrible stocks strategy to be the best house in a bad neighbourhood.

So I think what you’re gonna see is it the board of Apple is decided they would be ignoring fiduciary duty not to get into the business of luxury, they need to transition the best house, the best brand in the world into the best neighbourhood just by making that transition with the same level of profitability, they will take multiple up from 8 to probably 12 or 13. And you will have your first trillion dollar market cap company. There’s evidence they are already doing this. Today was Angela Aaron’s first day. The press release said she was going to run stores that is the biggest head fake in corporate America. She is not moving from London and making $21 million to go run stores in Cupertino. Anybody been to Cupertino?

I’ve been on boards of public companies trying to recruit CEOs. I would speculate the conversation when something went like this, “Apple is about to become the next great iconic luxury brand.” The market is going to recognise us for this, give us a greater multiple on ebita that reflects how strong our brands is. And we’re going to be the first trillion dollar market cap company. We want you to lead that. There’s other evidence. People don’t talk about Paul Deneve who joined Apple. A year ago, Paul Deneve was the CEO of YSL, in Saint Laurent. He is not designing the next iPad or working on iTunes. LVMH, Karen Group, Prada. Here comes Apple.

Let’s review, in social platforms. The winners: Instagram and WeChat. The losers: Tumblr, Pinterest, Twitter, and Four Square. In retail, the winners are Amazon and great multi-channel retailers with great digital. The losers are any e-commerce firm other than Amazon and retailers and brands that have weak digital. In society, some big winners: The Abject Poor and the middle class from emerging markets. Big loser: the middle class in developed markets.

My name is Scott Galloway. I teach at NYU and run a company called L2, and I appreciate your time.

About The Speaker – Scott Galloway

Scott is the founder of L2, a think tank for digital innovation, and Clinical Professor of Marketing at the NYU Stern School of Business where he teaches brand strategy and luxury marketing.